Economist says apartment market not at risk of "serious stress"

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Despite apartment oversupply being a common topic of discussion in recent times the risks of significant price falls or large numbers of buyers being unable to settle look to be relatively low according to a senior figure at one of Australia’s major banks.

In a research note published this week, Ivan Calhoun, NAB’s chief economist – markets, said that while the nation’s apartment market will face its toughest challenge over the next 12 – 24 months as a large number of apartments reach their settlement time “conditions for serious stress in the apartment market are not currently met.”

Figures in Calhoun’s note claim there are currently around 220,000 dwellings under construction, nearly 40% more than the 150,000-160,000 annual commencements that occurred in most years between 2006 and 2013.

Despite that, Calhoun said apartment prices are only predicted by NAB to fall 2% in 2017, with prices to be supported by favourable wider economic conditions.

“The outlook would be more concerning if the potential for oversupply were likely to coincide either with higher interest rates or higher unemployment,” Calhoun said.

“For now, neither of these pressures seems likely to coexist with apartment over-supply, meaning moderate declines in apartment prices in areas with oversupply seem to be the base case scenario, rather than something more concerning at this stage,” he said.

There has been a recent increase in settlement delays driven by foreign investors; however Calhoun said market conditions are encouraging buyers to settle and are also offering developers some protection if buyers are unable to meet their obligations.

“Recent trends and reports suggest there has been a modest increase in delays in settlement rather than outright non-settlement. And it is typically foreign buyers that are now finding it somewhat harder to access finance and/or expatriate finance.

“That said, given the continuing increase in prices that has occurred in recent years, these off the plan purchases of some two years ago are often currently sitting on reasonable unrealised capital gains. This is providing a strong incentive for owners to settle on the dwellings – and reportedly – along with the deposit – is currently providing a reasonable buffer for developers that are forced to sell any non-settled properties.”

While the fact a large number of new apartments in markets such as Sydney, Melbourne and Brisbane have been purchased by foreign investors has been considered as concerning by some, Calhoun said it might actually hold a positive as rental markets may not be flooded with new stock.

“Vacancy rates in Sydney, Melbourne and Brisbane currently remain around or slightly below long-term averages – a situation that could persist to the extent that many of the apartments have been purchased by offshore residents and don’t in fact come onto the local rental market,” he said.